Making short work

The coronavirus is a biological phenomenon; it affects us all. Rich and poor alike are falling ill, and we have seen that even a Prime Minister cannot be spared the evils of the virus. But is it really the “great equaliser”, as it has been called?

Economically speaking, the short answer seems to be no. The impact of the virus is unequal both within as well as across countries. In surveys administered in early April we found that 5 per cent of workers in Germany lost their job during the past four weeks due the pandemic. In normal circumstances this would be a shockingly high number. Nevertheless, it is dwarfed by the results we obtained from the UK and the US where 15 per cent and 18 per cent respectively report having lost their job due to the pandemic during the same period.

But not everybody has been equally likely to lose their job. Being able to work from home is a generally a good way of holding on to a job. And it is no coincidence that university graduates are more likely to hold these types of jobs. In the figure below we see how likely it is for somebody to have lost their job depending on whether their tasks can be performed from home. By the beginning of April, workers in the first quintile, the 20 per cent with the fewest tasks that can be done from home, lost their job with a probability of 40 per cent in the US, 30 per cent in the UK and 8 per cent in Germany. In contrast, for those in the fifth quintile, who can do a lot of their work from home, the job loss probability is much lower across all three countries. So could the difference between Germany and the anglophone countries lie in the type of jobs people hold?

Again, the short answer is no. In Germany the average share of tasks that can be carried out at home amongst our respondents is only 40 per cent, compared to 43 per cent in the UK and 45 per cent in the US. So in Germany slightly fewer tasks can be performed from home. One factor likely to be contributing to Germany’s position ahead of the pack is a well-established government scheme to buffer economic shocks. Kurzarbeit, a short-time work scheme, allows firms to adjust their workforce gradually—either sending them home or reducing their hours—in response to demand shocks, or in this peculiar case, when production is physically impossible due to lockdown and social distancing measures. The state pays a large proportion of the workers’ lost income. We find that about one in three workers that have kept their job are now employed under this programme in Germany.

Another advantage is that the scheme throws a lifeline to workers and firms alike. Firms do not have to worry about covering payroll and workers receive replacement income which should help them bring food onto their tables. This reduces the administrative burden and avoids having unemployment offices overrun and inundated to the extent that they cannot process individual applications, as has been reported for multiple states in the US.

The greatest advantage of the short-time work scheme is likely yet to come. Kurzarbeit allows a smoother transition into the recovery for two reasons. First, if a firm has laid workers off during the lockdown, it might have to rehire in order to run at the desired capacity once
restrictions are lifted. Rehiring is a costly and time-consuming process. Second, new workers might not be accustomed to the workings of the firm or simply might not fit. And training while social distancing might well pose its own challenges.

The UK introduced a response of its own to buffer the shock—the furloughing scheme. Under this scheme, firms can put workers on standby, while these workers receive either 80 per cent of their income or £2,500, whichever is lower. Currently the furloughing scheme is set to be extended until October. This is still a short horizon, but does provide some reduction in the uncertainty that workers and firms currently face.

Kurzarbeit allows a worker to clock any percentage of their usual hours. Imagine an accountant whose workload is largely diminished due to the pandemic but is still essential to sign off a few expenses from home for the firm to run. In the UK a CEO has to decide: Should I pay a full salary to somebody working, for instance, 20 per cent of their time and run my business to the greatest extent possible? Or should I shut everything down for the time being and offload all the payroll costs on to the government? From the taxpayer’s and consumer’s perspective, it is clear which of these scenarios is preferable. Introducing a more flexible furloughing scheme, which allows firms to adjust gradually, rather than all-or-nothing, could prove particularly crucial when reopening. We do not know how many more infection peaks are ahead of us and completely shutting down or ramping up production is not a smooth way forward.

Only time will tell whether Germany has done everything right. The replacement income covered by the government has recently been increased and the length extended. These changes might be welcomed by those receiving the payments but raise the question of who will be footing the bill. Governments have been reluctant to discuss how the emergency policies will be financed. This might be understandable given the drastic downturns, but the young might start to doubt their deal. They were more likely to lose their jobs in Germany given that they were the most likely group not to hold permanent contracts. Firing costs tend to increase with work tenure and are higher for permanent contracts in most countries. In our data we see that those with temporary contracts were the first to be laid off. So the young are less likely to enjoy the perks of Kurzarbeit and are likely to inherit mountains of accumulating debt. The burden of debt will be far lower with future economic growth. But how sure can we be about the future economic growth of an export-oriented economy which finds itself having to trade with countries in deep recession?

‘Will the green agenda be killed off by the longer-term coronavirus recovery? Or might the closure of so much business, and the cleaner air that results from planes not flying and factories not working, give us extra years to gain control of our environment?’